What Drives Innovation in Payments? EPC Invites European Authorities to Take the Market Perspective into Consideration

European Commission renews its call for innovation in payments

In January 2012, the European Commission (the Commission) published its Green Paper 'Towards an Integrated European Market for Card, Internet and Mobile Payments' (see 'related links' below). The paper is authored by the Commission's Directorate Generals (DG) Internal Market and Services and Competition. Commissioner Michel Barnier, in charge of the DG Internal Market and Services, said: "Europe has an opportunity to be at the cutting edge of what 'making a payment' could mean in the future. However, we will not be able to reach this goal with the current level of market fragmentation. Secure, efficient, competitive and innovative electronic payments are crucial for consumers, retailers and companies to fully enjoy the benefits of the Single Market as well as to drive the growth of e-commerce." The Green Paper claims to analyse "the obstacles which hinder European market integration in these promising payment technologies." According to Joaquín Almunia, Vice President of the Commission responsible for Competition Policy, today's "inefficient payment systems" within the European Union (
) "unduly undermine the global competitiveness of the European economy and limit its potential for growth. Europe's consumers, merchants and companies deserve payment services in tune with the 21st century: transparent, with genuine value added and making the best use of our technologies." (See the Commission's press release titled 'Breaking Down Barriers to Secure and Innovative Card, Internet and Mobile Payments' under 'related links' below).

Together with the Green Paper, in Januray 2012 the Commission adopted its communication 'A Coherent Framework for Building Trust in the Digital Single Market for e-Commerce and Online Services', announced with the Commission's previous communications 'A Digital Agenda for Europe' (May 2010) and 'Single Market Act: Twelve Levers to Boost Growth and Strengthen Confidence' (April 2011) (see 'related links' below). The press release titled 'Stimulating Growth and Employment: an Action Plan for Doubling the Volume of e-Commerce in Europe by 2015' (see 'related links' below) published by the Commission, together with its January 2012 communication on e-commerce and online services, states: "If 15 percent of retail sales were e-commerce and the obstacles to the internal market were removed, the gains for consumers might be as much as 204 billion euros, or 1.7 percent of European gross domestic product (GDP)." According to the Commission, main obstacles to generating these gains are "obstacles to the internal market" and "problems of payment".

Latest market developments indicate that substantial progress has been achieved in the areas of integration and innovation in the euro payments market

From the perspective of market participants both on the demand and the supply sides of the payments market, the Commission's analysis of the state of affairs in 2012 regarding integration of, and innovation within, the euro payments market is surprising.

The assumptions put forward with the Commission's communication 'A Coherent Framework for Building Trust in the Digital Single Market for e-Commerce and Online Services' overlook the fact that a study carried out on behalf of the Executive Agency for Health and Consumers (EAHC) (see 'related links' below), finds that none of the top five concerns stated by consumers about buying products online in another
country relate to payments. The EAHC performs the tasks and activities entrusted to it by the Commission, and it works closely with the Commission's DG Health and Consumers. Additional market research reveals that 'fragmentation of payment systems' does not rank within the top 15 issues having an impact on
cross-border online trading (see Accenture study included with 'related links' below).

Latest developments have generated a host of innovative solutions taking advantage of rapid technological progress in the areas of card, internet and online payments. As a result, the market is witnessing a spectacular growth in card transactions and contributions to the development of an integrated mobile payment ecosystem. Contrary to assumptions put forward with the Green Paper, payments do not act as a main barrier to the development of e-commerce; otherwise e-commerce would not have experienced continuous fast growth as evidenced by several market studies. The Green Paper also seems to overlook major market achievements to date, to progress the Single Euro Payments Area (
).

Innovation in payments: the market perspective

The generally recognised definition relied upon in the academic and market debate, states that 'innovation is the multi-stage process whereby organisations transform ideas into improved products, service or processes, in order to advance, compete and differentiate themselves successfully in their marketplace"1. In line with remarks shared previously in the
Newsletter, this author maintains that innovation will disappear without the right incentives, due to the effort and resources required to transform a new idea into a product or solution.

Innovation in payments is driven forward on a daily basis by hundreds of thousands of product managers and developers in the European payments industry seeking to design the most competitive offerings to consumers and corporate customers. In the past twelve years, i.e. since the launch of the
programme, thousands of new products have gone to market to facilitate, for example, automatic currency conversion, faster payments, auto conversion of message standards and expedited opening of bank accounts abroad. Other major innovations in the recent past include the roll out of sophisticated and secure electronic banking applications and the introduction of contactless payments. Migration to EMV chip and personal identification number (PIN) for face-to-face card transactions in Europe is nearly completed.

Following are the most important factors underlying innovation:

To generate the substantial resources within a company required to develop a new solution and bring it to market, developers must demonstrate that there is market demand for this solution.

Alternatively, the developer must demonstrate that the new solution is very likely to generate market demand in the future. In a previous
Newsletter article, this scenario was illustrated with a quote from Steve Jobs, who said: "We are not going to wait for customers to tell us what they want. We are going to introduce what we think is in their best interest, and they will learn to love it." Identification of future market needs is an art form for which there is no recipe (otherwise there would be no brand and business failures). See also item four in this list.

The competitive advantage to be generated with a new solution must be clearly identified, through analysis of competitors' existing offerings or based on confirmation that indeed the market to date does not yet provide the new solution considered for development.

The solution must be convenient and easy to use for the customer, especially in payments.

Bringing innovative solutions to market in a network industry may require cooperation between providers. If such cooperation in the non-competitive space is restricted by regulators, it is impossible to bring such solutions to market.

There must be a business case for providers to develop a new solution. Payments are not a commodity but a commercial offering.

Innovation always implies the risk of failure. The pressure on developers is huge to minimise that risk and make the first prototype work. In the real world, times of crisis such as these may limit the willingness of companies to take risks in the areas of research and development. Last but not least, service providers have to create a positive buying experience for customers when bringing new products to the market. This is particularly difficult in the area of payments. No one likes to make a payment; services provided in this context are rarely met by customers eager to embrace new solutions, whereas people will line up and spend the night on the street to be among the first to buy the latest edition of the iPhone. This author is not aware that customers ever made such efforts to greet the launch of a new payment product.

Documents published by the
regulators, addressing innovation in payments, do not reflect any of the items listed above; views articulated by the regulators on the subject may therefore risk overlooking the most important factors driving forward innovation in the market place.

From the perspective of payment service providers active in the market, regulation risks stifling innovation and standardisation initiatives led by market participants. Regulation is also not suited to keeping pace with the fast evolution of technology, fraud and market developments. As a matter of principle, any regulatory action should be technology-neutral. Regulatory intervention should not undermine the innovative capacity of the European payment sector and its competitiveness in the global marketplace.

Experience demonstrates that the most successful innovations materialise if the market is simply allowed to generate forward-looking payment solutions in response to customer demand. It would be welcomed if the Commission would take this market reality into consideration when determining the need for further
action in the area of payments.

For more information, refer also to the
response to the Commission's Green Paper on card, internet and mobile payments included with the 'related links' below and the article in this edition of the
Newsletter titled 'Towards an Integrated European Market for Card, Internet and Mobile Payments': Striking the Balance - Interoperability and the Access Dilemma. European Commission publishes feedback report on its Green Paper'.

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In this article

In this article, Günther Gall, Vice Chairman of the European Payments Council (
), highlights the substantial progress achieved with regard to the integration of, and innovation within, the euro payments market since the launch of the
programme. He outlines the most important factors driving forward innovation, including customer demand and a viable business model. The author reiterates that innovation must allow providers to compete and differentiate themselves successfully in their marketplace. Regulation, by contrast, risks stifling innovation and standardisation initiatives led by market participants; it is not suited to keeping pace with the fast evolution of technology, fraud and market developments. He clarifies that, as a matter of principle, any regulatory action should be technology-neutral. Last but not least, regulatory intervention should not undermine the innovative capacity of the European payment sector and its competitiveness in the global marketplace. The author would welcome it if the European Commission would take this market reality into consideration when determining the need for further European Union action in the area of payments.

Key Information in this Article

In this article, the following most important factors driving forward innovation in the market place are identified:

To generate the substantial resources within a company required to develop a new solution and bring it to market, developers must demonstrate that there is market demand for this solution.

Alternatively, the developer must demonstrate that the new solution is very likely to generate market demand in the future. In a previous
Newsletter article, this scenario was illustrated with a quote from Steve Jobs, who said: “We are not going to wait for customers to tell us what they want. We are going to introduce what we think is in their best interest, and they will learn to love it.” Identification of future market needs is an art form for which there is no recipe (otherwise there would be no brand and business failures). See also item four in this list.

The competitive advantage to be generated with a new solution must be clearly identified, through analysis of competitors’ existing offerings, or based on confirmation that indeed the market to date does not yet provide the new solution considered for development.

The solution must be convenient and easy to use for the customer, especially in payments.

Bringing innovative solutions to market in a network industry may require cooperation between providers. If such cooperation in the non-competitive space is restricted by regulators, it is impossible to bring such solutions to market.

There must be a business case for providers to develop a new solution. Payments are not a commodity, but a commercial offering.

Experience demonstrates that the most successful innovations materialise if the market is simply allowed to generate forward-looking payment solutions in response to customer demand.